Regulatory and Legal Reform

Policy and Legal

SEC Reverses Course After NAM Legal Challenge

The NAM secured a critical win Monday when the Securities and Exchange Commission issued an order reversing course on a novel rule interpretation that would have forced private companies to disclose proprietary financial information publicly, Law 360 (subscription) reports.

What’s going on: In 2021, the SEC adopted a novel reinterpretation of SEC Rule 15c2-11, imposing the rule’s public disclosure requirements on private companies that raise capital via corporate bond issuances under SEC Rule 144A—without giving manufacturers the opportunity to provide comment on the damaging impacts of such a consequential change.

  • The NAM and the Kentucky Association of Manufacturers pursued multipronged litigation and advocacy efforts arguing to the Commission and to the courts that the SEC’s actions were both procedurally improper and substantively indefensible.
  • Rule 15c2-11 requires public disclosures for the protection of everyday investors in publicly traded companies that issue so-called “penny stocks.”
  • But in 2020, the SEC expanded the rule to apply to privately held companies issuing corporate bonds to large institutional investors under Rule 144A.
  • For decades prior, Rule 144A permitted trades in private companies’ fixed-incomes securities without public disclosure of the issuers’ financial information. Indeed, the SEC’s entire purpose for adopting Rule 144A was to allow companies to access the debt markets without public disclosure of their financial and business-strategy information.

NAM in the news: The SEC took the rare step of reversing its position on Monday, declaring that “it is appropriate in the public interest and consistent with the protection of investors” to exempt Rule 144A fixed-income securities from the requirements of Rule 15c2-11.

  • “The order comes after industry groups petitioned the agency to provide relief to certain corporate debt issuers. The National Association of Manufacturers and the Kentucky Association of Manufacturers, which sought such relief in November 2022, also sued the agency in September, arguing that the SEC’s policy was enacted without public input and could harm job-creation efforts, given how many private companies rely on 144A bonds,” Law360 reports.
  • Bloomberg Tax (subscription) also covered the news.

Why it’s important: Expansion of Rule 15c2-11 would have meant higher borrowing costs and less liquidity in the market—and resulted in more than 100,000 job losses a year, according to recent EY analysis prepared on behalf of the NAM.

Our take: The SEC’s action not only restores private companies’ ability to access the debt markets, but also exemplifies why the NAM litigates—as a last line of defense, to force an agency’s hand.

  • “This order from the SEC is a landmark victory for manufacturers and a powerful affirmation of the NAM Legal Center’s ability to rein in regulatory overreach,” NAM Chief Legal Officer Linda Kelly said Tuesday. “We are thrilled that the Commission has reversed course on this unlawful attempt to impose a novel, onerous and wholly unjustified regulatory mandate on private companies.”
  • Added KAM President and CEO Frank Jemley: “We applaud the SEC’s decision to withdraw its ill-conceived proposal. American business and free enterprise are best served when government respects the boundaries of its authority, which the SEC clearly did not do in this matter.”
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